Financial Education

Profit margins measure how effective a company is at converting revenue into profits. Since the denominator of profit margin ratios is sales and the numerators are income statemtent items, all profit margin ratios can be found directly on a vertical common size income statement.

The major profit margin ratios are:

• Gross profit margin = gross profit/revenue
• Operating profit margin = EBIT/revenue
• Pre-tax margin = Pre-tax income/revenue
• Net profit margin = net income/revenue

Net profit margin is sometimes called return on sales (sales and revenue are often used as equivalent terms - those of you are are picky might note that sales more appropriately refers to product sales whereas revenue is a broader them that included sales and revenue from services or interest). In 2006, Plantronics had a net profit margin of:

Net income	81,150
Revenue	750,394
Net profit margin	10.8%

For more information, see all articles on: Common Size Analysis, Financial Statement Analysis, Fundamental Analysis, Investing in Stocks, Ratio Analysis, Security Selection

See also:

Translating a Foreign Subsidiary Income Statement Using the All-Current Method

Profitability Ratios

Gross Profit Defined

What is Behavioral Finance?

Adjusting Net Income for Currency Translation